Morningstar Income Equities Portfolio
Australia & New Zealand
Quarterly Update March 2015
Gareth James
Portfolio Overview
Senior Equity Analyst
The Morningstar Income Equities Portfolio rose an impressive11.0% during the March quarter, outpacing the
+612 9276 4583
gareth.james@morningstar.com
10.3% return of the S&P/ASX 200 Accumulation Index. Long-term portfolio returns remain very strong, with a
16.4% annualised return during the past five years versus just 8.6% for the benchmark. Portfolio returns are
Peter Warnes
even greater when franking credits are included, however, we exclude them from our return calculation as
Head of Australian Equity Research
the benefits vary depending on an individual's tax status.
+612 9904 5331
peter.warnes@morningstar.com
Yield compression and commodity price weakness remained key drivers of the Australian stock market in the
March quarter. The 26% fall in the iron ore price pushed smaller miners towards the brink with knock-on
effects for mining service providers. The 14% fall in the oil price piled even more pressure on oil and gas
Morningstar Style Box
29.4
8.5
6.3
0.0
0.0
Value
Blend
%
Equity Style Value
40.2
Equity Style Core
30.3
Equity Style Growth
29.4
Small
0.0
Mid
24.0
Large
31.7
Equity Style
0.0
producers and Shell"s acquisition of BG Group could be the first of many in the sector. Despite commodity
price weakness, the S&P/ASX 200 Accumulation Index still rose strongly during the quarter with the yield
compression effect exceeding commodity price weakness. The ending of the resources boom has reduced
resources stocks to 19% of the index, whereas interest-rate-sensitive stocks in the financials, real estate,
utilities, and telecommunications sectors now comprise 56% of the index.
The Income portfolio generally avoids resources companies given the volatile nature of their profits, meaning
Growth
commodity price weakness has been a tailwind for portfolio outperformance. Looking forward, we don"t
expect commodity price falls to continue at the same rate and outperformance by typical income stocks is
likely to become harder to achieve. Reflecting this view, we recently increased our exposure to BHP Billiton,
believing the yield to be attractive and sustainable.
Commodity price weakness continues to weigh on the economy with unemployment at a 12-year high and
iron ore price weakness creating a hole in the federal budget. The Reserve Bank of Australia's, or RBA's,
Income Portfolio - Top 10 Holdings
decision to cut the cash rate by 25 basis points to 2.25% in February helped yields compress further and
Weighting %
ASX-listed interest rate futures imply a further two 25 basis-point cuts by year end. Booming residential real
14.7
estate prices represent a challenge to further RBA cuts, though without further cuts, the property market is
Telstra Corp Ltd
Australia and New Zealand Banking Group Ltd
8.2
likely to consolidate. Despite interest rate cuts and yield compression, negative interest rates in Europe and
Westpac Banking Corp
8.1
APA Group
7.3
a 7% fall in the Australian dollar/U.S. dollar exchange rate during the quarter means Australia remains an
National Australia Bank Ltd
7.1
Commonwealth Bank of Australia
7.0
BWP Trust
6.1
Despite strong returns during the past year, portfolio metrics remain attractive with a weighted-average
BHP Billiton Ltd
6.0
yield of 4.7%, or 6.0% grossed up. It remains heavily skewed towards high-quality companies with 96% of
Wesfarmers Ltd
5.5
Scentre Group
4.6
the portfolio in stocks with either a narrow or wide economic moat, and all holdings have either low or
attractive home for foreign capital. With bank deposit rates below 3% and portfolio holdings yielding 5%, or
more than 6% with franking credits, yield compression can continue.
medium fair value uncertainty ratings
Investment Growth of $10,000
Time Period: 1/08/2001 to 31/03/2015
55,000.0
47,500.0
40,000.0
32,500.0
25,000.0
17,500.0
10,000.0
2,500.0
Income Portfolio
2003
2005
2007
2009
2011
2013
2015
S&P/ASX 200 TR
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Income Portfolio - Complete List of Holdings
Portfolio Date: 31/03/2015
Code
Price
AUD
PE
Hold
6.00
6.31
17.5
5.1
100
77.1
14.7
Yield Franked
%
%
Telstra Corp Ltd
TLS
É
Narrow
Australia and New Zealand Banking Group Ltd
ANZ
Ç
Wide
Medium Accumulate
42.00
36.64
12.8
5.4
100
101.3
8.2
Westpac Banking Corp
WBC
Ç
Wide
Medium
Hold
41.00
39.38
14.2
5.2
100
122.9
8.1
APA Group
APA
É
Narrow
Medium
Reduce
8.00
9.05
30.8
4.5
19
10.1
7.3
National Australia Bank Ltd
NAB
Ç
Wide
Medium
Hold
43.00
38.55
13.0
5.8
100
93.3
7.1
Commonwealth Bank of Australia
CBA
È
Wide
Medium
Hold
97.00
93.40
15.3
4.9
100
151.4
7.0
BWP Trust
BWP
Ë
Narrow
Medium
Reduce
2.70
3.00
18.4
5.4
0
1.9
6.1
BHP Billiton Ltd
BHP
È
Narrow
Medium Accumulate
40.00
31.03
17.8
5.2
100
99.7
6.0
Wesfarmers Ltd
WES
È
Wide
Medium
44.00
43.96
19.4
5.2
100
49.4
5.5
Scentre Group
SCG
È
Narrow
Medium
Hold
3.80
3.74
16.0
5.7
0
19.9
4.6
Spark New Zealand Ltd
SPK
Ê
Narrow
Medium
Hold
3.00
2.93
16.5
5.6
0
5.4
4.5
WOW
Ç
Wide
Low Accumulate
36.00
29.49
14.2
5.1
100
37.3
4.4
Charter Hall Retail REIT
CQR
Ê
None
Medium
Hold
4.20
4.29
13.9
6.5
0
1.6
3.7
Sonic Healthcare Ltd
SHL
É
Narrow
Medium
Hold
20.00
20.44
17.8
3.9
55
8.2
3.6
AMP Ltd
AMP
É
Narrow
Medium
Hold
7.00
6.44
15.7
5.0
75
19.0
2.8
AGL Energy Ltd
AGL
Ç
Narrow
Medium
Hold
15.00
15.20
15.4
4.4
100
10.3
2.7
Woolworths Ltd
Medium
MktCap Portfolio
AUD Weight
bn
%
Fair
Value
AUD
Style Economic
Uncertainty Recommend
Box
Moat
Hold
3.5
CASH
Note dividends for Spark New Zealand are imputed for New Zealand residents. Australian residents receive unfranked dividends with a supplementary payment.
Morningstar Investment Committee members own the following securities held by the portfolio: BHP, NAB, TLS, WES
Holdings-Based Style Map
Holdings-Based Style Trail
Deep-Val
Core-Val
Core
Core-Grth
Micro
Micro
Small
Small
Mid
Mid
Large
Large
Giant
Giant
Time Period: 30/04/2012 to 31/03/2015
High-Grth
Deep-Val
Income Portfolio
31/03/2015
S&P/ASX 200 TR
31/03/2015
Income Portfolio
Core-Val
Core
30/04/2012 31/03/2015
Core-Grth
High-Grth
S&P/ASX 200 TR
30/04/2012 31/03/2015
The above chart shows the portfolio and index style mix. The shaded area is the region in which
The above chart shows the portfolio and index style mix over time, the smallest dot representing the earliest
75% of the portfolio's holdings fall.
date.
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Transactions in the Quarter
Portfolio Fundamentals
Display Benchmark 1: S&P/ASX 200 TR
Inv
Moat Company Pct
96.1
Portfolio Price/Fair Value
0.97
Turnover (2 Yr Avg)
17.3
Forecast Yield Pct
5.01
Forecast Yield Pct (Grossed Up)
Average Market Cap (mil)
Bmk1
Cat Avg
We increased our holding in BHP Billiton in March from 3.5% to 6.5%, funded by a reduction in our APA
Group holding from 11.5% to 7.4%. APA Group was trading at a 17% premium to fair value whereas BHP
Billiton was at a 14% discount, meaning the transaction reduced the portfolio's weighted-average price-tofair-value ratio from 1.05 to 1.03. The proportion of holdings with moats and low or medium uncertainty
ratings was unchanged. The net dividend yield was also unchanged, however, the portfolio's weightedaverage grossed-up yield increased from 5.79% to 5.85%.
6.53
25,828.4
28,799.5
26,646.2
P/E Ratio (TTM)
15.0
16.7
17.1
Debt to Capital % (TTM)
38.9
39.1
39.0
ROA % (TTM)
7.4
5.2
5.3
ROE % (TTM)
21.6
16.1
16.2
BHP Billiton is a high-quality business with a narrow economic moat and medium uncertainty ratings, and
the stock is in our Best Stock Ideas. Other cheaper alternatives lacked either the quality or dividend
sustainability required for the Income portfolio. As one of the largest stocks on the market, BHP Billiton offers
exposure to a high-quality, diversified portfolio of low-cost and long-life resources assets. The diversified
nature of BHP Billiton's portfolio should smooth out the earnings volatility normally experienced by mining
companies. BHP Billiton is also one of the lowest-cost producers of iron ore in the world, meaning it should
be able to withstand weak iron ore prices as other miners cease production and the market tightens. The
Asset Allocation
company has a long history of paying and growing fully franked dividends and has committed to continue to
Portfolio Date: 31/03/2015
%
do so in future. BHP Billiton's dividends have grown every year since 2002.
Stock
96.5
The purchase means our underweight exposure to the materials and energy sectors reduced from 11% to
Bond
0.0
8% below market weight. We continue to rate APA Group highly and the company retains its narrow
Cash
3.5
economic moat and Exemplary stewardship ratings. However, the current demand for yield investments has
Other
0.0
pushed the shares above our fair value estimate to the point where the expected returns are low and the
Total
100.0
shares are overvalued.
Equity Country Exposure
Portfolio Date: 31/03/2015
%
Australia
New Zealand
Total
95.3
4.7
100.0
Equity Sectors (GICS)
Portfolio Date: 31/03/2015
%
Materials
Consumer Staples
6.3
10.3
Healthcare
3.8
Financials
49.4
Telecom Services
19.9
Utilities
Total
10.4
100.0
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Performance Relative to Peer Group (one month lag)
Quarter Performance
Peer Group (5-95%): All Managed Investments - Australia - Equity Australia Large Blend
The 11.0% return achieved by the Morningstar Income Equities Portfolio in the March quarter was
Return
Top Quartile
24.0
22.0
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
2nd Quartile
3rd Quartile
Bottom Quartile
particularly strong, and well above long term equity market returns. The pleasing 0.7% outperformance of
the benchmark S&P/ASX 200 Accumulation Index was driven by our underweight position in resources
stocks which suffered from commodity price weakness. Longer-term performance is impressive at 22%
compounded for three years, versus the benchmark return of 16%. The concentrated nature of the portfolio
means holdings are often overweight the benchmark and good stock selection translates into index
outperformance.
Contributors
Portfolio outperformance was, once again, driven by commodity price weakness and yield compression. Our
YTD
1 year
Income Portfolio
3 years
5 years
Since
inception
lack of exposure to oil stocks including Santos, Origin Energy, Oil Search, and Woodside Petroleum were all
key contributors to outperformance, as the oil price fell a further 14%. A lack of exposure to Fortescue
Metals Group and Rio Tinto, were also key contributors as the iron ore price fell a further 26%. Longer term,
S&P/ASX 200 TR
we expect the iron ore price to remain low, whereas we expect oil price weakness will be cyclical. However,
most oil stocks are not of sufficient quality for inclusion in the Income portfolio as many lack competitive
Risk-Reward
advantage, bring commodity price risk and do not provide the stable, and preferably growing, income we
Time Period: 1/08/2001 to 31/03/2015
seek.
18.0
Income Portfolio
15.0
S&P/ASX 200 TR
Portfolio holdings that helped outperformance included our overweight positions in APA Group, AMP and
AGL Energy. All three stocks benefitted from good financial results during the February reporting season as
12.0
well as yield compression among blue-chip stocks.
9.0
Detractors
Return
6.0
3.0
Woolworths was the only portfolio holding with a negative return during the quarter, despite announcing
0.0
record profit margins within its Australian food and liquor business with its interim result in February. The
0.0
3.0
6.0
market remains concerned discount supermarkets Aldi and Costco will cause price deflation and operating
9.0 12.0 15.0
deleverage for Woolworths, thereby causing profit margins to compress. We also forecast profit margin
Std Dev
compression, but consider Woolworths to have sufficient headroom to remain an attractive investment.
Spark New Zealand was the largest detractor from outperformance despite generating a positive return of
1.5% as the portfolio's weight is much larger than the index weight. The company reported a disappointing
Income Portfolio - Market Performance
interim result in February with competition making revenue growth challenging. Other detractors from
Time Period: 1/08/2001 to 31/03/2015
Inv
Bmk1
Up Period Percent
68.90
64.02
Down Period Percent
31.10
35.98
Best Month
Worst Month
8.53
7.98
-11.46
-12.61
Best Quarter
17.31
21.50
Worst Quarter
-15.64
-18.25
Up Capture Ratio
82.84
100.00
Down Capture Ratio
46.96
100.00
Inv
Bmk1
outperformance largely comprised stocks we didn't own that performed well, including Macquarie Group,
Toll Holdings, and ResMed Inc. These stocks were excluded from the portfolio either because of a lack of
economic moat or a relatively low dividend yield.
Risk
Time Period: 1/08/2001 to 31/03/2015
Return % pa
13.23
8.89
Std Dev
11.60
12.97
Downside Deviation
5.78
0.00
Alpha
5.22
0.00
Beta
0.68
1.00
57.35
100.00
Sharpe Ratio (arith)
0.71
0.30
Tracking Error
8.67
0.00
R2
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Sector and Industry Weightings Analysis
GICS Sector Weights Relative to Benchmark
49.4
48.6
Financials
19.9
Telecom Services
5.7
characteristics that align well with the portfolio's objectives. Sector exposures reflect both our
1.9
Consumer Staples
10.3
6.8
Materials
6.3
macroeconomic thesis and preference for high-quality and sustainable earnings. Earnings growth is likely to
be lower than for companies in the Morningstar Growth Equities Portfolio, and more capital-intensive sectors
such as materials and upstream energy will tend not to feature as they typically do not provide the
14.5
sustainable yield required.
3.8
6.0
Healthcare
Industrials
0.0
Energy
0.0
Consumer
Discretionary
0.0
Technology
0.0
0.7
The financial sector is our largest exposure, at about half of the portfolio, comprising 30% banks, 14% real
estate and 3% diversified financials. The wide moat-rated "big four" banks are a good fit for the portfolio with
7.2
medium fair value uncertainty ratings and highly regarded management teams. All, except National Australia
4.4
Bank have Exemplary stewardship ratings. Grossed-up yields of near 7% are among the highest for moatrated stocks in the S&P/ASX 200 Index. The average price-to-fair-value ratio of 0.93 for the big four banks
4.1
0.0
10.0
though we increased our BHP Billiton holding, and resources exposure, to 6.5% of the portfolio in March.
Banks, real estate, telecommunications and utilities represent 77% of the portfolio given their defensive
10.4
Utilities
The Morningstar Income Equities Portfolio sector exposure remained little changed during the March quarter,
also appeals, both in an absolute sense and relative to the index at 0.97.
20.0
30.0
40.0
50.0
60.0
The telecommunications services sector remains the portfolio's second-largest sector weighting, at 19%,
and the largest overweight position versus the benchmark's 6% weighting. Sector exposure comprises a
Income Portfolio
15% weight to Telstra Corporation and 5% weight to Spark New Zealand, formerly Telecom Corporation of
S&P/ASX 200 TR
New Zealand. Telstra has a net yield near 5%, grossed up to 7%, while Spark New Zealand offers a yield of
5.6% including supplementary dividends. They both have narrow economic moats stemming from low-cost
GICS Industry Group Weights Relative to Benchmark
advantages and long-established dominant positions in their domestic markets, enabling attractive and
sustainable earnings and dividends. These attributes make them valuable portfolio holdings.
13.6
Telecommunication Services
Real estate is the third-largest sector exposure, with a 14% weighting versus a 7% benchmark weight. Real
7.9
Utilities
estate appeals to the Income portfolio given the relatively stable earnings streams and above-average yields.
7.0
Real Estate
We prefer REITs with long-term leases and high-quality tenants, fixed or inflation-linked rent increases and
4.0
Food and Staples Retailing
low vacancy risk relative to the more volatile and less predictable developers. The portfolio owns BWP Trust
and Scentre Group, which fit that bill. BWP Trust's earnings are secured by long-term leases to hardware
0.8
Health Care Equipment and Services
powerhouse Bunnings. Scentre Group offers exposure to high-quality shopping malls which enjoy dominant
Consumer Durables and Apparel
0.0
Household and Personal Products
-0.1
Automobiles and Components
-0.1
Capital Goods
-0.4
Software and Services
-0.7
Media
-0.7
The portfolio has only a 6% exposure to materials via diversified, high-quality and low-cost miner BHP Billiton,
Retailing
-0.7
and very little exposure to upstream energy. The materials and energy sectors comprise 14% and 4% of the
Food, Beverage and Tobacco
-0.8
benchmark respectively so we're significantly underweight both. Resources producers are generally unsuited
Banks
-2.0
Insurance
-2.0
Consumer Services
-2.5
Commercial Services and Supplies
-2.7
Pharmaceuticals and Biotechnology
-3.1
Diversified Financials
-3.5
Transportation
-4.3
Energy
-4.4
Materials
positions in premium locations in Australia and New Zealand.
Our second-largest overweight position is to the utilities sector, comprising 10% of the portfolio against a
benchmark weight of just 1%. Utilities stocks are a core holding for many income portfolios and typically
provide highly defensive earnings, high payout ratios and strong and stable dividends.
to the portfolio given their capital intensity and exposure to cyclical commodity prices, attributes which
generally don't support stable yields. Our natural aversion to resources for this strategy means the portfolio is
likely to outperform in resources bear markets.
-8.5
-20.0 -10.0
0.0
10.0
20.0
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Returns Relative to Benchmark
Return
As of Date: 31/03/2015
25.0
22.5
20.0
17.5
15.0
12.5
10.0
7.5
5.0
2.5
0.0
22.6
22.2
11.0
11.0
10.3
3 month
16.4
15.8
14.1
13.2
10.3
8.9
8.6
YTD
1 year
3 years
Income Portfolio
5 years
Since inception* (31/07/2001)
S&P/ASX 200 TR
Performance measures are expressed before fees, costs and taxes are deducted. Dividends are reinvested in the portfolio. The performance displayed is for the Morningstar Income Equities Portfolio and represents modelled performance only. This performance will differ
from actual performance depending on factors such as transaction timing and any divergence from constituent weightings.
* Where inception date is not the beginning of a month, returns are calculated using a start date which is the first day of the month following inception.
Selection Effects
Time Period: 1/01/2015 to 31/03/2015
Outperform
12.00
6
6.00
1
5
14
7 15
9
2
114 12
3
8
5
8
14
12
11
10
2
9
13
15
7
10
-6.00
Underweight
13
6
1
4
3
0.00
Overweight
Relative Weight
Underperform
-12.00
-45.00
-36.00
-27.00
-18.00
-9.00
0.00
9.00
18.00
27.00
36.00
45.00
Relative Return
Best Selections
Investment Type
Weight +/-
Return +/-
1
APA Group
Stock
9.08
10.66
2
Woodside Petroleum Ltd
Stock
-1.81
-13.14
3
Rio Tinto Ltd
Stock
-1.86
-8.69
Effect
Worst Selections
Investment Type
1.14
1
Weight +/-
Return +/-
Effect
Spark New Zealand Ltd
Stock
5.10
-9.86
-0.51
0.26
2
Macquarie Group Ltd.
Stock
-1.47
20.72
-0.29
0.16
3
Woolworths Ltd
Stock
2.15
-12.45
-0.27
4
Suncorp Group Ltd
Stock
-1.30
-11.08
0.15
4
Charter Hall Retail REIT
Stock
3.97
-6.69
-0.27
5
AMP Ltd
Stock
1.49
9.58
0.14
5
BWP Trust
Stock
6.15
-3.29
-0.20
6
Fortescue Metals Group Ltd Stock
-0.31
-38.03
0.13
6
Telstra Corp Ltd
Stock
10.24
-1.61
-0.15
7
Santos Ltd
Stock
-0.56
-21.92
0.13
7
Toll Holdings Ltd
Stock
-0.34
42.78
-0.13
8
AGL Energy Ltd
Stock
2.06
6.14
0.12
8
QBE Insurance Group Ltd
Stock
-1.13
8.32
-0.10
9
Oil Search Limited
Stock
-0.66
-17.73
0.12
9
ResMed Inc DR
Stock
-0.42
23.19
-0.09
10 CSL Ltd
Stock
-2.99
-3.68
0.11
10 Qantas Airways Ltd
Stock
-0.41
19.19
-0.08
11 Origin Energy Ltd
Stock
-0.90
-11.86
0.11
11 Newcrest Mining Ltd
Stock
-0.69
11.96
-0.07
12 Insurance Australia Group Ltd Stock
-1.03
-10.14
0.11
12 Incitec Pivot Ltd
Stock
-0.41
16.77
-0.06
13 BlueScope Steel Ltd
Stock
-0.20
-35.63
0.08
13 Iluka Resources Ltd
Stock
-0.21
34.34
-0.06
14 Amcor Ltd
Stock
-1.15
-5.62
0.07
14 Wesfarmers Ltd
Stock
2.37
-2.50
-0.06
15 Alumina Ltd
Stock
-0.33
-19.98
0.07
15 Henderson Group PLC DR
Stock
-0.23
25.39
-0.05
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Allocation Effects
Time Period: 1/01/2015 to 31/03/2015
Outperform
Overweight
Relative Weight
Underperform
12.00
2
5
6.00
2
4
4
3
1
3
1
Underweight
0.00
-6.00
5
-12.00
-15.00
1
2
3
4
5
-12.00
-9.00
Best Weighting
Energy
Utilities
Pharmaceuticals and Biotechnology
Commercial Services and Supplies
Materials
Weight +/-4.86
10.53
-3.17
-2.67
-10.59
-6.00
Return +/-13.58
3.17
-5.36
-6.03
-2.38
-3.00
0.00
Effect
0.69
0.38
0.17
0.17
0.14
1
2
3
4
5
3.00
Worst Weighting
Diversified Financials
Food and Staples Retailing
Transportation
Consumer Services
Real Estate
6.00
9.00
Weight +/-3.24
4.42
-4.12
-2.40
7.51
12.00
15.00
Relative Return
Return +/13.34
-7.40
3.58
5.76
-1.84
Effect
-0.42
-0.33
-0.15
-0.13
-0.12
Cumulative Attribution Effects
Time Period: 1/04/2014 to 31/03/2015
GICS Industry GroupCumulative Attribution Effects
Attribution Effect %
Cumulative Allocation Effect
12.00
Cumulative Selection Effect
Cumulative Active Return
9.00
6.00
3.00
0.00
-3.00
-6.00
4.00
Attribution Effects
Allocation Effect
Selection Effect
Active Return
2.00
0.00
-2.00
4-30-2014 5-31-2014 6-30-2014 7-31-2014 8-31-2014 9-30-2014 10-31-2014 11-30-2014 12-31-2014 1-31-2015 2-28-2015 3-31-2015
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
Equity Sectors (GICS)
Time Period: 1/04/2012 to 31/03/2015
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
09/2012
03/2013
Energy %
Consumer Discretionary %
Financials %
Utilities %
09/2013
03/2014
Materials %
Consumer Staples %
Information Technology %
09/2014
03/2015
Industrials %
Healthcare %
Telecom Services %
Equity Style Valuation
Time Period: 1/04/2012 to 31/03/2015
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
09/2012
03/2013
Value %
09/2013
03/2014
Core %
09/2014
03/2015
09/2014
03/2015
Growth %
Equity Market Capitalization
Time Period: 1/04/2012 to 31/03/2015
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
09/2012
Giant %
Small %
03/2013
09/2013
Large %
Micro %
03/2014
Mid %
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Investment Methodology and Process
Quarterly Update March 2015
Portfolio Mandate and Typical Positioning
Income Portfolio Strategy
The Morningstar Income Equities Portfolio Australia & New Zealand is an actively managed concentrated portfolio
consisting of our best income ideas in the S&P/ASX 200 Index. The portfolio is constructed with a focus on long-term
fundamental value and bias toward businesses with sustainable competitive advantages (economic moats) and
predictable cash flows.
Total return from the Income Portfolio will tend to be driven more by income than capital appreciation, although both
are desirable. Income holdings have expected sustainable net yields greater than or equal to the benchmark using the
estimates of our research team. In addition, coverage companies with above average dividend per share growth
prospects over the next five years receive preference, all else equal. We may occasionally initiate a position with less
than benchmark net dividend yield if the gross yield is greater than the benchmark’s net yield, dividend per share
growth prospects are well-above average, or to increase the portfolio's share of high quality (narrow or wide economic
moat) companies. Dividend sustainability is a key consideration and is partially accounted for by not allowing Very High
or Extreme uncertainty ratings into the Income Portfolio, as this reduces exposure to difficult to predict cash flows.
Moreover, high uncertainty stocks are infrequently purchased. Sustainability is further tested by ensuring potential and
current holdings can meet the above criteria with long-term normalised payout ratios. Preference is given to
companies that can sustain unexpected shocks and still provide attractive yields.
Investment Strategy Committee Process
Morningstar’s equity portfolios are managed by their portfolio managers and our eight-person investment strategy
committee which comprises selected members of the equities research team. Committee meetings reinforce rigor and
consistency of research methodology through collaborative debate on proposed and existing holdings. A constant
feedback loop between Morningstar’s research team and investment committee members leverages team strengths
in vetting stock calls and portfolio holdings. This constant cycle strengthens team culture, expertise and ratings,
minimising key-person risk and common behavioural pitfalls.
The committee is experienced and well-resourced, ensuring stability and succession planning. Representation from
each sector team ensures cross-market expertise. Committee members have average industry experience of 17 years
and average tenure with Morningstar of 10 years. We are not averse to an occasional portfolio manager change, as
the driving forces behind our portfolio construction process are our bottom-up research and investment committee
overlay.
In-depth research by our large, global, and experienced analyst team is the bedrock of our portfolio management
process and facilitates our high conviction investments. We have more than 100 equity and credit analysts globally,
covering around 1,700 stocks and 700 debt issuers, making us one of the largest independent research teams in the
world. Our 20 Australian and New Zealand-based analysts cover about 230 Australian and New Zealand stocks which
includes extensive research reports, timely event analysis, actionable special reports, and deep discounted cash flow
modelling on every company. This is complimented by our local credit research to help us assess the complete capital
structure and preserve capital while pursing upside opportunities.
Investment Committee Feedback Loop
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Income Equities Portfolio Australia & New Zealand
Quarterly Update March 2015
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT
Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs.
Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest.
Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is
copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").